Answer to Question #148574 in Microeconomics for Khalid

Question

If the supply curve is perfectly elastic and demand is linear and downward sloping, what is the effect of a $1 specific tax collected from producers on equilibrium price and quantity, and what is the incidence on consumers? Why?

Answer 1

Burden of a tax affects both buyers and sellers of the taxed good. When the supply is elastic, buyers carry most of the burden. The price of the goods increases reducing the quantity demanded. Consumers are not affected by price changes and the quantity demanded remains constant when tax is introduced.